Derivatives Sample Questions - CFA L1

Rahul Gupta (Project Controller ACA MBA(Fin.))   (8014 Points)

15 May 2010  

1) Question:

Which of the following statements is (are) true with respect to valuing option contracts?

I. The time value of both a call and a put will decrease as the contracts near expiration.
II. For a call to be at the money, its intrinsic value must be greater than zero.
III. Due to the efficiency of the options markets, the actual price of the option is usually equal to its intrinsic value.
IV. For a put contract to be out of the money, the actual price of the underlying asset must be greater than the strike price of the option.


A) III only
B) I, II and III only
C) II, III and IV only
D) I and IV only

 

 

2) Question:
Your research department has just made a sound presentation arguing that the equity markets are due for a severe correction in the short term. Which of the following strategies would be most suitable for safeguarding the portfolio that you manage?

A) Long futures contracts on an equity index
B) Construct a bull-call spread
C) Buy call options on an equity index
D) Buy put options on an equity index

 

 

3) Question:
Which of the following are not features of a futures contract?

A) Initial margin deposit is required irrespective of whether you long or short a contract.
B) A long position may be offset by shorting the exact same contract.
C) Daily settlement
D) Only the contract size and the futures price is set by the market participants.

 

4) Question:

Which of the following statements are true with respect to the treatment of nonrecurring items and discontinued operations?

I. Unlike U.S. GAAP, IAS GAAP does not require the separate reporting of regular earnings, earnings from discontinued operations and extraordinary items.
II. Both IAS GAAP and U.S. GAAP have the same requirements for classifying a transaction as an extraordinary item.
III. Losses from discontinued operations must be reported under U.S. GAAP when it can be reasonably estimated, whereas IAS GAAP requires that these losses be reported only when they are realized.
IV. According to IAS GAAP, the correction of an error may only be accounted for by restating prior period statements.



A) I and III only
B) III and IV only
C) I and IV only
D) II, III and IV only

 

 

 

5) Question:
ABC Company just entered into an interest rate swap agreement with another company. ABC has agreed to make semi-annual payments at a fixed rate of 7.6% per year. The counterparty, on the other hand, has agreed to make variable payments at a rate of LIBOR + 1. With a notional principal of $15 million, which of the following statements would hold true for the first payment in six months if LIBOR were 6.1% today and 6.9% in six months?

A) ABC would receive a net payment of $37,500.
B) ABC would receive a net payment of $22,500.
C) ABC would have to make a net payment of $22,500.
D) ABC would have to make a net payment of $37,500.

 

6) Which of the following statements is false with respect to derivative securities that involve a contingent claim?    

(a) Sellers of options do not have any control with respect to the exercise of the option.

(b) When selling a call, any claim is contingent upon the buyer exercising the call.

(c) When buying a call, an investor must pay the premium.

(d) Buying a put exposes the investor to a contingent claim.

 

 

7) Which of the following events will lead to an increase in the value of a call option?    

(a) A declining time to maturity

(b) Declining price of the underlying asset

(c) An increase in the discount rate

(d) An increase in the exercise price

 

 

8) Which of the following statements least accurately describes the features of the eurodollar time deposit market?    

(a) A dollar-denominated time deposit with a bank in Japan is considered as a eurodollar deposit.

(b) With eurodollar time deposits, all the interest is accumulated and paid one time at the maturity date of the deposit.

(c) EURIBOR is the rate quoted on euro-denominated deposits.

(d) LIBOR is the rate that a London bank is willing to pay on deposited funds.

 

 

9) Which of the following statements is (are) true with respect to the mechanisms involved in futures trading?

I. A daily price limit is the amount by which the futures price is allowed to move from the opening of the trading session to the close of trading in the same day.
II. When the futures contract is said to be locked limit, it is an indication that trading has ceased.
III. Scalpers usually generate a higher frequency of futures trading than would day traders.
IV. If a delivery option is chosen, the invoice price for the underlying asset will always be equal to the agreed upon futures price times the contract size.

   

 

 

10) Two parties enter into a three-year interest rate swap, which involves the exchange of LIBOR+1 for a fixed rate of 12% on a $100 million notional amount. The LIBOR rate today is 11%, but is expected to increase to 15% in one year and fall back down to 8% in the following year. Which of the following statements accurately depicts the flow of net cash flows between the two counter-parties?    

(a) The fixed rate payer would receive a payment of $4 million at the end of year two, while the variable rate payer would receive $3 million at the end of year three.

(b) The fixed rate payer will have to pay $4 million at the end of the second year and $3 million at the end of the third year.

(c) The fixed rate payer will have to pay $1 million at the end of the first year.

(d) The variable rate payer would receive a payment of $4 million at the end of year two, while the fixed rate payer would receive $3 million at the end of year three.